Central Bank of Nigeria
Suddenly, it is no fun anymore commenting on the policy direction of the Central Bank of Nigeria’s (CBN) rate-setting committee ― the Monetary Policy Committee (MPC). (Now that I think of it, it never really was much fun. With everything here up in the air, it was always more a duty one felt was due to one’s country). Back to the main narrative, though.
The MPC met early last week, and agreed to raise the policy rate by 75 basis points. Why? Who cares? Ahead of the meeting, the headline inflation rate for June was down about 2 percentage points from the May figure. So why raise rates if inflation numbers are nearing target? Apparently, because in spite of the lower rates, consumer prices have been anything but stable in the last three months: prices have moved within a 1.5 percentage point band either way of the mean in this period. Then, there is the little problem with core inflation. Over the last few months too, this has been stable. In other words, despite the MPC’s best attention, core inflation has been indifferent. So, the very target that the CBN should be concerned about is the one that appears sticky going down.
Structural difficulties? No doubt, plenty of them. The fiscal side of the macroeconomic equation in the country has been, well, suspect of late. Of recent, government has rediscovered the nasty habit of spending more than it earns. This has put plenty of money in the hands of a few people, whose spending has in turn pushed up prices across the economy. One such price has been the exchange rate of the naira. As demand for dollar (and other foreign currency)-denominated assets have grown, we have seen the exchange rate of the naira plummet.
The largely unstated problem with this side of the economic equation has been its limited supply responses. With the most active sectors of the economy gazing at their navels, and the real sector in the doldrums, sadly, we are not generating enough foreign exchange to keep the rate at which the markets clear the naira low. We have been depending instead, on hydrocarbon exports as the only source of foreign currency supply to the market. Diversify the base of the economy including through new public investment in infrastructure and services, improving private sector space, etc? A tale for all seasons, that.
Problem number…? Now I’m beginning to lose count. But the CBN has dipped into our external reserves to help keep movement in the naira’s exchange rate within a range of +/-3% around the US$1/N150 rate. Why not let the naira drop to a new price at which the clearly excessive demand for this scarce and increasingly difficult to replenish resource equals the limited supply? Put differently, why are we throwing money down the drain? I’m told, and this is the only argument going for this on the table, that in an import-dependent economy such as this it makes little sense to suffer a drop in the value of the naira. Inflation I’m told could just reach for the rafters.
And from that argument, we step into the magical circle. Because our import-dependent status has led to us ignoring domestic production capacities, we are not generating the levels of foreign exchange necessary to match the demand for dollar-denominated assets. Conversely, we cannot allow the market to clear this imbalance, because the adverse consequences of the new equilibrium would be exacerbated by our import-dependent status. Into this deep hole, the Nigerian economy will very soon collapse. But before this disaster; or an Alexander comes to cut the Gordian knot, recall that the FAAC allocation for July, at N1.3 trillion was three times the usual. Some arrears we are told are being met by this new elevated sum. But not the new minimum wage, apparently. Because, in spite of the larger July allocation, sub-national governments have cavilled at respecting the law.
So, another massive infusion of money into the system. Domestic prices will respond. And the MPC at its meeting in September will put up rates again. We have apparently gotten into a steady rhythm. A self-fulfilling prophecy, going round in increasingly tighter cycles? What use then is commentary of any sort? Tales told by idiots? Full of plenty of posturing and fancy words? But of little or no use?